Bakshi et. al. (1997) analyzes the empirical performance of some alternative option pricing models. I am interested to do this as well - hence applying different models - but I am unsure how to handle the OptionMetrics data.

Something that stood out from the article for instance is that they adjust the spot stock price for discrete dividends of European call options. My first question is then immediately, when does this need to be done? And does anybody knows whether OptionMetrics does this automatically. Also which other adjustments (beside the filters) are needed? How can I know which adjustments need to be done and is there any documentation on this?

Additionally, does anybody know a good guide on starting to work with OptionMetrics (i.e. what to watch out for and how to handle the data). Thank you.


1 Answer 1


I've always been skeptical of the quality of OptionMetrics' dividend information in the first place. Furthermore, subtracting out discounted dividends is an inaccurate way to deal with cashflows while pricing options.

OptionMetrics also does not control for borrow/lend spreads, and their American option pricing model is not the best.

My recommendation would be to use OptionMetrics only for price information, and back out your own volatilities using better-designed models and some good dividend information. OptionMetrics vols are good enough for the back office, but not really for serious work.


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